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| Author: | Ioannidis, C. Peel, D. A. Peel, M. J. |
| Title: | The Time Series Properties of Financial Ratios: Lev Revisited |
| Journal: | Journal of Business Finance and Accounting
2003 : JUN/JUL, VOL. 30:5-6, p. 699-714 |
| Index terms: | BUSINESS RATIOS TESTS DECISION MAKING |
| Language: | eng |
| Abstract: | This paper re-evaluates the time series properties of financial ratios. It presents new empirical analysis which explicitly allows for the possibility that financial ratios can be characterized as non-linear mean-reverting processes. The authors hypothesize that financial ratios may follow a random walk near their target level, but that the more distant a ratio is from target, the more likely the firm is to take remedial action to bring it back towards target. This behavior will result in a significant size distortion of the conventional stationarity tests and lead to frequent non-rejection of the null hypothesis of non- stationarity, a finding which undermines the use of these ratios as reliable conditioning variables for the explanation of firms' decisions. |
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